Greenspan concerned with weak dollar
Federal Reserve chairman says U.S. must address trade, budget deficits or face future woes.
November 19, 2004: 9:51 AM EST
NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan warned the U.S. must deal with the causes of the weak dollar -- the U.S. trade deficit and the federal budget deficit -- or the country could run into economic problems down the line.
Greenspan said that while history has shown that developed countries are not necessarily hurt by a weak currency, "we cannot become complacent. History is not an infallible guide to the future," he said in a speech delivered in Europe.
The text was released in Washington.
"More will need to be done in Europe as well as in the United States to ensure that our economies are sufficiently resilient to respond effectively to all the shocks and adjustments that the future will surely bring," he concluded.
Greenspan focused on the nation's current account deficit, the measure of both trade and investments across the national board, which he said has risen to more than 5 percent of gross domestic product, the broad measure of the nation's economy.
"It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," he said.
Greenspan said it is therefore important that the U.S. budget deficit be cut, a move that would reduce the current account deficit.
"Reducing the federal budget deficit (or preferably moving it to surplus) appears to be the most effective action that could be taken to augment domestic saving," he said. "Corporate saving in the United States has risen to its highest rate in decades and is unlikely to increase materially. Alternative approaches to reducing our current account imbalance by reducing domestic investment or inducing recession to suppress consumption obviously are not constructive long-term solutions."
The value of the U.S. dollar, which has been hitting a series of four-year lows versus the yen and record lows against the euro during the last couple of weeks, fell following Greenspan's remarks.
Greenspan said that so far the evidence is that there is still strong demand for U.S. assets by overseas investors and central banks. Those investments help limit the current account deficit and keep the dollar from sinking further.
"We see only limited indications that the large U.S. current account deficit is meeting financing resistance," he said. He added, however, "Net claims against residents of the United States cannot continue to increase forever in international portfolios at their recent pace.
"This situation suggests that international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing of the U.S. current account deficit and rendering it increasingly less tenable," said Greenspan.
Greenspan said he did not foresee a crisis in markets if the United States does not close its so-called twin deficits. While he didn't identify what potential crisis he was referring to, some economists have suggested that a sudden collapse in the value of the dollar was possible without taking steps to close the deficits. Greenspan's comments seemed to dismiss that worst case scenario.
Greenspan began his comments saying he was speaking as an individual, not for the Federal Reserve.
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